Life Cycle of a Bond

How does an idea become a bond? It’s a journey in five phases. The first is the planning phase.

1. Planning

Every few years, issuers like cities and school districts create Capital Improvement Plans. These Plans describe critical projects like building new schools, parks or infrastructure and estimate the funds that will be needed to support those projects.

Public improvement bonds often need public approval. This occurs in phase two – the campaign phase.

2. Campaign

Public officials and political campaigners collect signatures in support of a bond issuance, backed by voter taxes. If a petition reaches a certain percentage of signatures from qualified citizens, the proposition is added to the ballot. Some issuers, like school districts can submit a petition directly to the ballot without collecting signatures.

Now the real campaign starts. Public officials and nonprofits work together to raise money and run marketing campaigns in support of the bond proposition. Community members can join the campaign coalition, share its messages, and vote ‘yes’ or ‘no’ during the next election.

If enough votes are made to support the proposition, in most states we enter phase three – the Governance Phase.

3. Governance

In this phase, an oversight committee is established with a set of bylaws, powers and regulatory duties to ensure the proper stewardship of the public’s money. Citizens are appointed to the committee and meet regularly to check on the progress of the issuance.

Once the committee’s in place, we enter phase four – Team Selection.

4. Team Selection

Now, issuers must choose partners like lawyers, bankers and advisors to work on the bond issuance. By federal and state laws, the issuer and the issuance team prepares several documents that lay out the legal conditions of the issuance and describe it to potential investors. When these documents are ready, the governing body, such as the city council or school board, approves the bond issuance.

Now we’re officially in phase five – Issuance.

5. Issuance

The bond sale is announced and documents like the Preliminary Official Statement are filed with the Municipal Securities Rulemaking Board, to help investors decide if they’d like to invest. The underwriter sets the price of the bonds and investors can place orders with a broker. When orders are agreed, the bonds are issued to the buyers, who can keep them until they mature, earning interest each year, or sell them.

Now, bonds are in the hands of investors and funds for the project are on their way to the issuer. However, the process is still not over. The bond oversight committee continues to meet and oversee the project until it’s completed and the funds from the bond issuance have been spent.